S&P 12-month forward P/E ratio

SP 500 valuations may be reasonable at current yield levels, but they are at the upper end of the historical range. Supportive macroeconomic conditions include robust wealth effects, subdued oil prices, tight labor markets, and positive real wage growth.

However, downside risks are mounting.

Tariff pressures and trade policy uncertainty are constraining capital expenditure. Firms have absorbed higher import costs, but rising margin pressures may lead to partial pass-through to consumers, posing a near-term inflation risk.

The Federal Reserve faces a policy dilemma.

Political pressure for rate cuts is increasing, but premature easing could exacerbate inflation. The Feds independence is likely to hold until Chair Powells term ends in May 2026, though its tone may shift thereafter.

In the second half of 2025, lower U.S. growth and reduced capital expenditure are expected. A 25-basis-point rate cut by year-end is possible, and the European Central Bank may also take action.

Persistent deficits and further policy loosening could lead to a repricing of long-end yields.